AGBM 408 Study Guide Questions with
complete solution
A loan customer is in default when they fail to make a scheduled loan
payment. T/F - correct answer ✔True
The probability of default (PD%) depends on which of the following (select the
best answer)? - correct answer ✔-The collateral used to secure the loan
-The two-factor system depends on the probability of default *HINT* (Factor 1)
and the loss given default (Factor 2). The probability of default has nothing to
do with the loan or the asset being acquired. The probability of default is
based entirely on the financial health of the borrower.
-The asset for which the loan is being used to acquire
*Correct Answer: The financial health of the firm borrowing the money*
-None of the above
All other things being equal, the greater a borrower's current ratio the greater
their probability of default. T/F - correct answer ✔False
All other things being equal, the greater a borrower's debt to asset ratio, the
greater the probability of default. T/F - correct answer ✔True
A borrower would like a loan to acquire land. The borrower is investing 50%
equity in this asset. Of the choices below, which one best characterizes the
loan security? - correct answer ✔-Under-secured
(Because land is a reclaimable asset and the borrower is also contributing lots
of equity, the loan would not be considered under-secured or not secured.)
-not secured
*Correct Answer: Well Secured*
, A borrower would like a loan to invest in a hot air balloon in order to open a
hot air balloon café that will dock with other hot air balloons in the area to sell
the ballooners drinks and snacks. The borrower is not investing any equity in
this asset. Of the choices that follow, which one best characterizes the loan
security? - correct answer ✔*Correct: Under-secured*
-exceptionally well secured
-well-secured
The greater the borrower's risk class, the greater the borrower's probability of
default. - correct answer ✔True
You work as a loan officer and are considering a loan application. The PD %
is 27% and the LGD% is 50%. What is the expected loss (EL%)? - correct
answer ✔27%
0%
50%
*Correct: 13.5%*
A loan has an outstanding balance (principal owed) of $200,000. The loan has
a PD% of 2% and an LGD% of 50%. What is the expected loss in dollars
(EL$)? - correct answer ✔$200,00
$400
*Correct: $2,000*
$0
The longer your credit history, the lower your credit score. - correct answer
✔False
complete solution
A loan customer is in default when they fail to make a scheduled loan
payment. T/F - correct answer ✔True
The probability of default (PD%) depends on which of the following (select the
best answer)? - correct answer ✔-The collateral used to secure the loan
-The two-factor system depends on the probability of default *HINT* (Factor 1)
and the loss given default (Factor 2). The probability of default has nothing to
do with the loan or the asset being acquired. The probability of default is
based entirely on the financial health of the borrower.
-The asset for which the loan is being used to acquire
*Correct Answer: The financial health of the firm borrowing the money*
-None of the above
All other things being equal, the greater a borrower's current ratio the greater
their probability of default. T/F - correct answer ✔False
All other things being equal, the greater a borrower's debt to asset ratio, the
greater the probability of default. T/F - correct answer ✔True
A borrower would like a loan to acquire land. The borrower is investing 50%
equity in this asset. Of the choices below, which one best characterizes the
loan security? - correct answer ✔-Under-secured
(Because land is a reclaimable asset and the borrower is also contributing lots
of equity, the loan would not be considered under-secured or not secured.)
-not secured
*Correct Answer: Well Secured*
, A borrower would like a loan to invest in a hot air balloon in order to open a
hot air balloon café that will dock with other hot air balloons in the area to sell
the ballooners drinks and snacks. The borrower is not investing any equity in
this asset. Of the choices that follow, which one best characterizes the loan
security? - correct answer ✔*Correct: Under-secured*
-exceptionally well secured
-well-secured
The greater the borrower's risk class, the greater the borrower's probability of
default. - correct answer ✔True
You work as a loan officer and are considering a loan application. The PD %
is 27% and the LGD% is 50%. What is the expected loss (EL%)? - correct
answer ✔27%
0%
50%
*Correct: 13.5%*
A loan has an outstanding balance (principal owed) of $200,000. The loan has
a PD% of 2% and an LGD% of 50%. What is the expected loss in dollars
(EL$)? - correct answer ✔$200,00
$400
*Correct: $2,000*
$0
The longer your credit history, the lower your credit score. - correct answer
✔False
